Rent Control During Inflationary Times

In the past couple of centuries, classical music has experienced inflation—but not the economic inflation we are seeing now. Rather classical music has experienced pitch inflation.

Many of us think of A above middle C a 440 Hz. That’s what the International Organization for Standardization decided – but only after there were complaints about 439 Hz being a prime number. I used

440 Hz when I was in music school. But my son was taught to tune to 442 Hz to create a brighter sound. Some professional symphonies also tune to 442 Hz today.

But even 440 Hz was inflationary. Handel supposedly wrote for a standard A = 422 Hz. By the mid-19th century, A=435 Hz was the standard in many places, while others promoted standard "Verdi" tuning where A= 432 Hz.

This pitch inflation had consequences on instruments. Existing instruments and strings can only accommodate a limited amount of pitch variation. Violin strings are designed to accommodate a range of pitches. Significant changes in pitch require a different type of string. Pitch inflation is one explanation for the migration from gut strings to metal-wound gut strings as the standard A pitch increased.

Plus, higher pitches require tighter strings, no matter the type of string. Tighter strings place more pressure on the top of a string instrument. So, instruments may need to be adapted to withstand that higher pressure.

Many people say real estate is a good hedge against inflation. Many think rents and, therefore, real estate values will continue to increase with the cost of living. Rising multifamily rents have caused some to advocate for more rent control to keep apartments affordable for current tenants.  

It costs money to replace a tenant, so landlords are interested in retaining good tenants. Yet when there is inflation, landlords experience the same increased expenses as their tenants – labor, utilities, and maintenance supplies all go up in price. As a result, landlords may have little choice but to raise rents if they are to maintain their property and continue to provide tenant amenities.

But residential tenants, pressed by increasing costs, may resist rent increases and call for rent control law. Historically, seen mostly in large cities on the coasts, in 2021, St. Paul, Minnesota adopted the first rent control measure in the Midwest. And lawmakers and advocates in Florida, which has been particularly hard-hit with apartment rent increases, are suggesting overturning a state law banning rent control.

Yet, in inflationary times, rent control laws might be akin to requiring a musician to use an unwrapped gut string while tuning their violin to A=442 Hz—it creates a lot of tension, doesn’t won’t work well, and the string could break. This article discusses how rent control works – and doesn’t work – during inflationary times.

What Determines Rental Rates? 

State and local laws traditionally have imposed control on residential landlord-tenant relationships, but usually only on property condition and security deposits, and a process for evictions. Until recently, only a few major metropolitan areas, such as New York City and Washington DC, have rent control laws.

Where there are no rent control laws, landlords have significant control over what is in their leases and how they maintain their buildings. But the final say over rental rates goes to the market – supply and demand. No matter how expensive it is to operate a rental property, tenants generally won’t pay rent higher than market rates.

What Are Rent Control Laws

Rent control laws limit the rent a landlord can charge through a ceiling on rents or limit on rent increases. Since rent control laws may permit significant increases when a new tenant moves in, many laws also limit when a landlord can refuse to renew a tenant’s lease. That way, a landlord can’t evict a paying tenant simply to enable it to charge a rent higher than the landlord could charge the current tenant.

Rent control laws have long existed in some major cities, such as New York, Los Angeles, Boston, and Washington, DC. Oregon was the first state to adopt a state-wide rent control law, and other states have followed.

With the news reporting a 30% year-over-year increase in apartment rental rates in some areas of the country, rent control laws are gaining appeal among lawmakers and voters. And many jurisdictions had rent control initiatives on the ballot for the midterm elections last November.

In Orange County, Florida (where Orlando is located), voters approved a 9.8% annual limit to rent increases—but only for one year. Other jurisdictions adopted significantly lower annual limits, some as low as 3%. Meanwhile, in Portland, Maine, voters approved rent control limiting annual rent increases to 70% of the increase in the Consumer Price Index (CPI). Pasadena, California passed a similar measure, with a limit of 75% of the CPI.

What Rent Control Doesn’t Address

Because rental rates are based on multiple factors, blanket increases often fail to consider economic realities for tenants and landlords. When rent control laws limit landlords’ potential for revenue growth without regard to market factors of supply and demand, landlords may be forced to cut amenities or defer maintenance.

Further, rent control limits financial opportunity and may disincentivize developers from adding new rental units to an already tight market. So rent control laws can increase scarcity and make it more difficult for people to find housing.  

For example, the annual seasonally adjusted CPI announced on December 13, 2022 was 7.1%. The annual increase in shelter expenses was the same-7.1%. If rent control limits increases to an amount that’s lower than the CPI, many landlords won’t be able to continue operations and maintenance at the same level.

Plus, rent control laws don't consider other landlord expenses, such as wage increases, which, like rent increases, occur during inflationary times. As of the end of September 2022, the Bureau of Labor Statistics (BLS) reported that civilian wages had increased 5.1% in the previous year. So, for many tenants, the rent increases were partially offset by wage increases.

Yet, landlords also are affected by increases in wages for property management and maintenance staff. Many rent control limits will require landlords to operate with fewer employees, pay employees below-market rates, or cut amenity or maintenance expenses so they can pay market wages.

Rent control laws also can significantly affect the housing market and the community by disincentivizing property improvements. Landlords unable to recoup the costs of major upgrades have little incentive to advance the cash to make those upgrades. Although tenants might not experience significant rent growth, they may find themselves living in antiquated units with fewer amenities.

Rent control laws also can “trap” tenants in ill-suited housing. Since most rent control laws are focused on limiting increases for existing tenants, tenants may be hesitant to move. For example, the two-bedroom, one-bath apartment that was perfect for a couple with one child may be inadequate for a family that has grown to include three children. Yet, those tenants may remain in the unit that no longer meets their needs if rent control results in their paying below-market rent in their existing apartment or if they know their current rent can't be increased significantly.

Finally, rent control may result in less landlord flexibility for tenants facing financial challenges. Since it’s expensive to evict a tenant and prepare an apartment for a new tenant, landlords have incentives to retain tenants.

However, if, due to rent control, the tenant is paying below-market rent, the landlord's incentives may change. Rent control laws don't prohibit the eviction of tenants whose rent is delinquent. So, rather than working to retain the current tenant, the landlord might be better off evicting the tenant and finding a new tenant who will pay more rent.

Unintended Consequences

As music experienced “pitch inflation,” the instruments that performed that music had to change. Musicians who tried to perform music with “inflated pitches” on traditional gut strings found that their strings weren’t up to the task.

Their instruments also may not have withstood the increased pressure necessitated by higher tension on the strings. To sustain inflation, musicians had to adapt their instruments and strings.

An inflationary economy also forces changes in the multifamily industry. While rent control might limit the harsh impact of rent increases on tenants in the short run, rent control also can impede changes required for the industry to adapt to a new economic reality.

© 2023 by Elizabeth A. Whitman

Any references clients and their legal situations have been modified to protect client confidentiality.

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